What is a title loan and how does it work?

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A title loan uses your car as collateral. Title loans are generally easy to obtain, but they are expensive and risky. (iStock)

If you need money to cover an unforeseen emergency, you may be considering a title loan. Title loans can seem like a great option because you can usually get one quickly without a credit check. But this is a risky and expensive form of borrowing, so you should consider other options.

What is a title loan?

A title loan is a short term secured loan that uses your car as collateral. If you are approved for this type of loan, you will give the lender title to your vehicle in exchange for a lump sum of cash. Compared to other loans, title loans are generally quick and easy to obtain.

How does a title loan work?

If you own your car, you can take out a title loan quickly without a credit check. Once you give the lender title to your car, you will receive your money.

Most securities lenders allow you to borrow 25 to 50% of the value of your car. Repayment terms are generally short, ranging from 15 to 30 days. In most cases, securities loans come with high fees that correspond to annual percentage rates, or APRs, of around 300%, according to the Consumer Financial Protection Bureau.

If you are looking for a loan, you can compare personal loan rates within minutes with Credible.

How Much Does an Auto Title Loan Cost?

Suppose you want to take out a title loan for $ 1,000. First, to qualify for this amount, your car will need to be worth at least $ 4,000 – $ 1,000 equals 25% of $ 4,000.

The lender charges a 25% monthly finance fee, so you will need to pay $ 250 to borrow $ 1,000. While a rate of 25% doesn’t seem too high, it translates to an APR close to 300%. You may also need to pay origination fees, document fees, and other fees in addition to finance fees.

Compared to traditional personal loans, securities loans are very expensive. Depending on your credit and the lender you choose, you may be able to land a personal loan with a fixed single-digit interest rate and a repayment term of 12 to 60 months or more. This can give you lower, more manageable monthly payments and lower the overall cost of your loan.

What is the difference between a title loan and a payday loan?

Title loans and payday loans have high costs. But a title loan uses your car as collateral while a payday loan does not. You usually have to pay off a payday loan within two weeks when you receive your next paycheck. You can have up to a month to pay off a title loan.

Title loans and payday loans are expensive and risky forms of borrowing that can trap you in a cycle of debt. They should therefore only be considered as a last resort.

Is a Title Loan Bad for Your Credit?

Lenders typically don’t perform a credit check when you apply for a title loan, so getting one won’t affect your credit score.

Title lenders also don’t report your payments to the credit bureaus, even if you make all of your payments on time. For this reason, a title loan will not help you if you want to build or improve your credit score.

Personal lenders generally report your payments to the credit bureaus. You can compare the rates of personal loans using Credible.

What happens if you default on a title loan?

You can continue to drive your car while you pay off your title loan, but the lender can install a GPS or a starter interrupt device or make a copy of your keys. This way he can repossess your vehicle if you default.

If you default on a title loan, the lender can repossess your vehicle and sell it to get their money back. Under your state’s laws, some lenders are allowed to keep all the money they earn from selling your vehicle, even if they earn more than you owe on your loan.

Pros and Cons of a Title Loan

Securities lending has several advantages and disadvantages to consider.

Advantages

  • No credit check – Most title deed lenders don’t perform a credit check when you apply, which can be a huge plus if you have poor credit and are struggling to get approved for other types of loans. ready.
  • Quick approvals – You won’t have to wait long to get approved for a title loan. Once you’ve completed your application and provided photo ID, the lender will likely get back to you the same day.
  • Quick financing – If you are approved for a title loan, the lender can deposit the money into your bank account immediately or within a few business days.

The inconvenients

  • High interest rates and fees – While securities lending can be convenient, they will cost you money. Compared to other types of loans, their interest rates and fees are very high and can trap you in a cycle of debt.
  • Short repayment terms – Securities loans must be repaid within 15 to 30 days. If you don’t have enough cash on hand, this can be a challenge. Some lenders will allow you to roll over your loan if you can’t pay it back on time. But it will incur even more interest and fees, and increase the amount of money you have to pay back.
  • Risk of losing an asset – If you default on your loan, the lender can seize your car and sell it to get their money back, leaving you without transportation.

Is a title loan a good idea?

At first glance, a title loan may seem like a good idea. But it’s an expensive form of borrowing that puts your vehicle at risk. There are almost always better options.

If you choose a title loan as a last resort, be sure to shop around and compare title lenders. Read the fine print and understand the terms of your loan before signing on the dotted line.

Alternatives to securities lending

Before opting for a title loan, consider these options.

Alternative payday loan

Alternative payday loans are small, short-term loans offered by federal credit unions. They don’t require a guarantee, and repayment terms typically vary from one to six months.

You can borrow between $ 200 and $ 1,000 with an interest rate capped at 28%. Although you can get approved for an alternative payday loan even if you don’t have good credit, you must have been a member of a credit union for at least a month to qualify.

0% APR credit cards

If you can get approved for a 0% APR rate credit card, you may be able to cover an emergency expense without paying interest for a period of time.

But once the introductory period is over, you will need to pay interest at the card’s regular rate. It is therefore important to pay off your balance before the end of the introductory period.

Personal loan without guarantee

An unsecured personal loan does not require any collateral. If you are approved for one, you will receive your money up front and pay it back each month for an agreed term, which can be up to several years.

Banks, credit unions, and online lenders all offer unsecured personal loans. If you have good credit, you may be able to get one with a low interest rate and great terms. Many lenders consider people even if their credit is not in good condition. Just keep in mind that if you are approved for a loan, you might not receive the best rate. Still, if you can get one, an unsecured personal loan is probably a much better option than a title loan.

Borrow from friends or family

Consider asking your loved ones if they can lend you money. A family member or friend can work with you to develop a flexible repayment plan with low or no interest.

If you go this route, be sure to document the loan details to avoid confusion and repay the loan as promised so as not to strain your relationship.

Credible allows you to easily compare personal loan rates to see what you might qualify for.



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